Solar Industry sees some Positive Light

The recent news flow in the solar industry has started taking a positive slant with increasing panel prices and resurgent demand from new areas like China and Japan. Quarterly results have started surprising on the positive side, though many companies continue to accumulate losses. Some stock like First Solar (FSLR), Sunpower (SPWR) have gone up by more than 100% in the last year, as investors think that these companies will survive this vicious downturn. Smaller companies like AIES and Enphase Energy (ENPH) have also done remarkably well and managed to increase market share in a down market.  However, stock prices remain far below their peak values reached in 2008, as the global solar industry stiff suffers from a huge overcapacity (almost 80%). Zombie Chinese companies like Suntech (STP) and LDK Solar (LDK) still continue to produce solar panels despite defaulting on their bond repayments. While the smaller solar panel companies have shut down, the bigger Chinese giants continue to run, despite their debt mountains and liquidity problems.

Equilibrium in 2015

Lux Research thinks that the solar industry will return to equilibrium only in 2015 when demand catches up with the supply. They think that the industry will grow to more than 50 GW from the current 30 GW. I think that Lux Research is being a bit pessimistic given the current trends, as I think that the industry should return to equilibrium in mid 2014 as companies keep going bankrupt. Technology advances will eliminate weaker solar companies who do not have the money to invest in normal operations, let alone invest in new equipment. European companies have almost disappeared while the Japanese companies are only surviving due to the boom in their local market. No new company is entering the solar market compared to the deluge of new entrants before the crisis. The recent solar module price rise indicates that quality solar panels are seeing increased demand compared to the supply. Also solar trade war is leading to higher tariffs which are pushing up prices. Only companies with a large geographical footprint will be able to survive as the global solar market gets more dispersed.

Solar Companies that will Survive

I like the US solar company Sunpower (SPWR) because of its good technology, solid project experience and the backing of its parent – Total. The company was in danger of going bankrupt but was saved by Total. Not only is the company managing to reduce costs but will also be a major beneficiary of the European duties on solar panel imports. The European company Renewable Energy could be another big winner in the long term, if it manages to get through this crisis. This company is the only vertically integrated large Western solar company in the crystalline silicon space. It has managed to expand its solar panel market share in the last year as it has focused more on the downstream market. Companies will have to keep investing in new technology and cost optimization to gain an edge in this commodity industry. The solar booms in China and Japan will not last forever and the industry will have to compete with fossil fuel energy in order to continue the exponential growth.

Lux